Tata Tetley Acquisition

THE TIMES OF

TATAThe Tale of Tata- Tetley AcquisitionPresented By- Roopali T- 05

Once Upon A Time in India

TATA Tea was set up as a JV with a UK based James Finlay and Co1962

Acquired Sterling Tea from James Finlay & Company for Rs. 115 Million

Set up tea factory in Munnar (Kerala) and blending/packaging unit in Bangalore

1975

Renamed itself as Tata Tea Ltd after buying the entire stakes from James Finlay 1982

Rewinding 100 Years Back- The Tale of Tetley

Established by Joseph and Edward Tetley in 1837 in Yorkshire, England1837

In India, Tata and Tetley Tea entered into a joint venture to produce tea bags

An Iconic brand, Tetley is considered to be the inventor of teabags

1992

At the time of acquisition, Tetley was second largest tea company in the world2000

Summer of 2000- The Tale of Acquisition• One of the most important milestones in the Indian corporate history

• Deal Worth- In the Year 2000, Tata Tea acquired the iconic Tetley Brand in a $450 Million deal from

Schroeder Ventures and PPM ventures. At the time of acquisition, Tata Tea’s net worth was only $114 m.

• Counter Bids- After a long drawn out battle first with Schroder Ventures, followed by a bitter retreat in 1995,

and then with Sara Lee, Tata Tea finally tasted victory on March 10, 2000

• It was also the largest cross-border acquisition by an Indian company at that time. This was also the first ever leveraged buy-out by an Indian Company.

Chai Pe Charcha- Why The Deal Made Sense

Readymade access to the European and North American market

Tetley’s technical expertise

Tetley’s premium brands and global distribution network

Tata Tea could become the second largest tea company in the world

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Leverage Buyout• Acquisition of a company through a combination of Equity and Debt

• Formation of SPV

• Stock Purchase Format- Target shareholders sell their stock to the buying group

•Asset Purchase Format- Issues liquidating dividend to the shareholders or becomes an investment company Proceeds are distributed to shareholders Management buy-out

• Management Buyout

• Future Cash Flows or the Assets of the company as security

• Increased Debt Equity ratio

Advantages & Disadvantages of LBOAdvantages

• Heavy Interest & principal forces management to improve performance & operating efficiencies

• Cost improvisation – cost reduction

• Divesting non-core business

• Investing in technological upgrades

• Significant reduction in agency cost

• Tax shield

Disadvantages• Financial distress – uncertainties

• Increased fixed costs associated with debt financing can worn out the effect in case of downturn in business cycles

• In leveraged acquisition, banks have a say in what is being done

Structure of The Deal• Special Purpose Vehicle - Tata

Tea(Great Britain) created

• Purpose was to acquire all the assets of Tetley

• To ensure that Tata Tea's balance sheet does not suffer additional funding costs

• Will be merged into Tata Tea Ltd, once it has paid its debt obligations

Special Purpose Vehicle (SPV)

SPVTATA TEA

GREAT BRITAIN(₤70 mn)

TATA TEA INCTATA TEA

(₤10 mn)

(₤15 mn)GDR Issue(₤45 mn)

100% subsidiary

Special Purpose Vehicle (SPV)• The SPV leveraged the ₤70 mn equity 3.36 times to raise a debt of ₤235 mn to

finance the deal

• Entire debt amount comprised 4 tranches A, B, C and D whose tenure varied from 7 to 9.5 years

• The 4 Tranches are: Rabo Bank - ₤185mn, Intermediate Capital Group - ₤30 mn, Mezzanine - ₤10 mn, Schroders - ₤10 mn

• Where was the money utilized? Tetley Acquisition – ₤271 mn Legal, Banking and Advisory services – ₤9 mn Tetley’s WC requirements - ₤25 mn

Structure of The Deal

Tata Tea GB

Tata Tea

Tata Tea Inc

Mezzanine

Schroders

Intermediate Capital Grp

Rado Bank

₤10 mn

₤15 mnGDR₤45 mn

₤10 mn

₤10 mn

₤30 mn

₤185 mn

Equity- ₤70 mn Debt- ₤235 mn

Tetley Acquisition Tetley WCLegal & Bank Charges₤271 mn ₤9 mn ₤25 mn

Debt Repayment StructureA B C D

Amount ₤150 mn ₤75 mn ₤30 mn ₤50 mn

Loan Type Long Term Long Term Long Term Revolving

Purpose Funding Acquisition

Funding Acquisition

CAPEX WC

Year of Maturity 2007 2007 2008 2007

Pay Back Method

Semi Annual Installments

2 instalments in 07-08

2 instalments in 07-08

Cessation of Credit

Interest rate 11% 11% 11% 11%

Concept of SPV Explained• Tata Tea (GB) and SPV was created as a part of securitization process

• Securitization is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities, that can be sold to investors

• Tata Tea (GB) took over all the properties of Tetley

• Tata Tea originated Assets of Tetley through receivables, leases, any other form of debts and funded the same ( Originator)

• Portfolio of Tetley assets were then sold to Tata Tea (GB) – SPV for funding the assets.

Tata Tea ( GB )Special Purpose Vehicle

TetleyObligor

Tata TeaOriginator

InvestorsSale of Assets

Consideration for Assets purchased Subscription of Securities

Issue of Securities

Concept of SPV Explained• Tata Tea (GB) issues debts and purchased the assets from Tata Tea

• Tata Tea (GB) was owned by Tata Tea

• Debts issued by Tata Tea are secured by assets acquired from Tetley (Obligor)

• Tata Tea (GB) subcontracts the administration of assets back to Tata Tea

• Tata Tea (GB) issued tradable securities – tranches to fund the purchase of assets

• Rabo Bank, Mezzanine Capital, Schroder Ventures and Intermediate Capital Group purchased the securities offered by Tata Tea (GB)


TetleyObligor

Tata TeaOriginator



Issue of Securities

Concept of SPV Explained• They all invested because they were confident that the securities would be paid in

full and on time from the cash flows that is made available from the asset pool

• Money collected by Tata Tea (GB) was paid to Tata Tea

• As cash flow arises on the assets, Tata Tea (GB) used for repaying funds to the investors in the securities

• Note- SPV’s are not companies in operations; they do not have any business except acting as a legal instrumentality. This is necessary to ensure ‘asset-backed’ securities


TetleyObligor

Tata TeaOriginator



Issue of Securities

Post AcquisitionProfitability Of TATA TEA LTD.

Year Net Sales Net Income Total Assets ROA Total Equity ROE

(INR millions) (INR millions) (INR millions) % per year (INR millions) % per year

2001 67441 89116 146923 61% 89698 99%

2002 71232 81606 152300 53% 96799 84%

2003 74103 80648 154024 52% 97863 82%

2004 77002 83845 142017 59% 97524 86%

2005 88632 95024 152908 62% 104897 91%

2006 96820 104017 169743 61% 116126 90%

2007 105447 114611 270461 42% 156555 73%

Post AcquisitionMerger Implications

Tata Tea Pre Acquisition Tetley Pre Acquisition Consolidated Post acquisition

Position in the value chain

40% of turnover came from packed tea bags

100% turnover came from packed tea bags

Company has moved up the value chain 84% of turnover came from packed tea bags

Increased outsourcing

Produced 95% of its tea requirements in house

Outsourced entire requirement from 35 different countries with an estimated procurement of 3 million kgs of tea every week

Today 70% of TATA Tea requirement is outsources from 20 different countries thus reducing the risk associated with fluctuations in production arising out of various factors.

Predictable margins

Margins highly correlated with tea cycle

Margins inversely correlated to tea cycle

Margins hedged

Global footprint Domestic operationsUK and USA account for bulk sales

Global presence

Post Acquisition- Reaction of Stock Market

Post Acquisition- Integration• A executive board fumed with 6 people from both companies to plan and devise the

integration plans

• Simultaneously a board of non-executive members were formed who were neutral with the objective of introducing Tetley in India

• Also as last and final measure individual committees were formed to look at scope for integration in different areas like Commercial business, Supply chain, IT team etc.

• However the synergies of the companies were not so strong as planned

• For most part it was quite impossible to fuse the working of Tata Tea and Tetley together as they both had different structures. Thus the following happened-

Post Acquisition- Integration• Tetley focused on producing tea the packaging and selling, whereas Tata focused on

producing tea in own plantations and then selling

• Tetley was a global brand and hence had more standardized product mix, which focused on quality, whereas Tata was an Asian brand and as per customer preference focused more on making product as per local taste

• Hence apart from exchange of R&D and technological know – how, and help to grow in each other market both the companies could not be integrated to achieve better results.

• Thus the CEO’s of both the companies felt that allowing independent operation for both the companies along with a kind of Co-integration alliance was best

Thank You!

Tata Tetley Acquisition

Business

Transcript of Tata Tetley Acquisition